What’s next for USD/JPY after it briefly dropped below 140.00?

Welcome to the MUFG Global Markets FX Week Ahead podcast with Leigh Hardman, Senior Currency Analyst at MUFG. It's Friday the 25th of April, 2025, and joining Leigh to post some questions on the financial market themes for the week ahead is Michael Owen, Head of Global Client Desk EMEA. The following podcast is intended for professional investors and eligible counterparties only.

And not for retail clients. Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Good afternoon Leigh.

Hi Michael. So it's been another eventful week for the dollar and we hit another year to date low before a rebound. What have been the main drivers of dollar performance this week?

Yeah, certainly at the start of this week we saw another heavy sell off for the dollar and that was on the back of the building kind of fears that President Trump could take action to undermine the independence of the Fed when setting monetary policy. There was certainly building kind of speculation that he could take action to try and fire Fed Chair Powell before his term comes to an end next year. Obviously, if that was to materialize, that would be a significant kind of negative shock to confidence in U.S. policymaking.

It could have led to certainly a more adverse outcome for the U.S. economy, increasing the risk of a more stagflationary outcome as inflation expectations could have become more unanchored if Powell was to be sacked. Fortunately, Trump did come out quickly to kind of deny that speculation and say that he has no plans to fire Chair Powell. So certainly that has provided some relief for the dollar and U.S. assets.

And that's certainly one reason why we have seen the dollar start to rebound as this week has progressed. The second reason is that there's also more optimism that we could see further kind of reversal or kind of watering down of some of Trump's kind of worst tariffs that he's put in place. There's certainly been a number of comments from Trump administration officials and reports in the media suggesting that Trump could take action to reduce some of the tariffs that have been put in place on China.

Certainly, we'd agree with the comments from U.S. Treasury Secretary Scott Bevin, who described the current tariff rates on China as unsustainable. Obviously, at these kind of levels at around 145 percent, it's pretty much a kind of de facto trade embargo.

It brings kind of trade between China and the U.S. to a dead end, really, at this point in time. So clearly that can't be sustained, that the two kind of major economies in the world not trading with each other. That would have obviously significant negative implications for global growth.

And we think it's just a matter of time before we see those tariffs reduced. Certainly, the media reports are suggesting they could be brought back down somewhere between sort of like 50 to 60 percent, maybe more in line with where Trump previously had been campaigning to raise tariffs on China. So from a kind of short term perspective, that's kind of been viewed as a potential kind of positive development, which has helped risk sentiment to improve and to instill more confidence back into the dollar and U.S. policymaking.

But we still stress that even if tariffs were to be brought down to those levels, they'd obviously still be very significantly high levels, which would be disruptive for trade, between the U.S. and China. So any kind of dollar rebound on the back of these kind of stories at this stage, we think are likely to be kind of sustainable gains, really. Yeah, thanks very much, Lee.

Now, just moving on to dollar-yen, we did have a drop down sort of 140 level earlier in the week. You've obviously touched on the dollar side, huge driver of this. But we also have the Bank of Japan next week.

So do you expect anything out of the Bank of Japan and the performance for the yen for this week? Yeah, like I say, next week is going to be the first time that we have the BOJ setting monetary policy since Trump announced his Liberation Day tariffs back in earlier this month. So we certainly do expect the BOJ to incorporate the impact of those tariff announcements into their policy update next week, given the trade disruption that's going to cause not just for Japan from the direct tariffs that have been put in place on imports from Japan, but also the obviously negative implications as well for the rest of global growth.

That's obviously going to have a negative impact on Japan's economy as well. So we do think that the BOJ will obviously acknowledge that when they update their economic projections next week. We'd expect to see the growth projections downgraded, at least for the current fiscal year.

We could also see some modest downgrade as well to the inflation forecast for the current fiscal year. So I think the BOJ should kind of reinforce the messaging that we had at the last policy meeting in March, where they expressed more kind of caution over the outlook for further rate hikes at a time where those trade risks were obviously very elevated. And you could argue that those risks have started to materialize to the downside to growth in Japan.

So for us, it would make sense that the BOJ does sound more cautious in the week ahead. But we still think that the main message will be that they still stick to the overall plan to that they're likely to continue to tighten monetary policy going forward. Obviously, we have seen some positive, more positive inflation data this week from the latest Tokyo CPI report where we saw significant upsides of price.

So fundamentally, we're still kind of confident in the view that underlying inflation pressures in Japan are moving into line with the BOJ's target. And that still should support further BOJ rate hikes. But I just think that the timing of those hikes is likely to be delayed until later this year.

I think for the yen, obviously, if the BOJ does sound kind of more cautious next week, that in itself could encourage some some further yen selling next week. But we would kind of argue that the market is already kind of already repriced to price in kind of rate hikes from the BOJ later this year. So it shouldn't really be a big surprise for the market if the BOJ sounds more dovish.

And we'd still think on overall in an environment where kind of other major central banks like the Fed, Bank of England, ECB officials over the past week or so have been sounding more dovish and talking about the prospect of cutting rates further. We feel rate spread between Japan and the rest of the world is likely to continue to narrow. And with global growth slowing, we still favour some further upside for the yen going forward.

Thanks very much, Lee, and wishing our listeners a good week ahead. Thank you for listening to this MUFG Global Markets podcast. Rate, review and subscribe and contact your MUFG sales rep for more information.

Come back next week for more insights from the global markets research team.